First-year audit finds fault in for-profit hospital's finances

A year after a for-profit company took over Meadowlands Hospital Medical Center and vowed to shore up its finances, the hospital posted a 10 percent profit — more than four times the state average — and paid its investors $8.4 million, according to a draft financial report submitted to the state.

But the audit also states that the 230-bed hospital in Secaucus defaulted on a loan and overdrew a bank account by $1 million in 2011. Employees say paychecks have bounced at least three times since December, prompting an investigation by the state Department of Labor.

Hospital officials, however, are disputing some of those findings by their auditor, saying the overdraft and the paycheck issues were their bank’s fault, not theirs. They say they are particularly unhappy with the use of the word “default.”

“We made all the payments,” said Tamara Dunaev, one of the principal owners and vice chairwoman of the hospital board. The loan, she said, was refinanced.

MHA LLC, a private investment group, purchased the hospital for $15 million and took over in the final weeks of 2010. Its acting president and chief executive officer, Lynn McVey, said they have turned around a “dying” facility.

Hospital officials said that Meadowlands has a zero percent infection rate and that new services, such as a sleep lab, had been added along with a hospital-based OB-GYN practice that is putting Meadowlands on track to have 2,000 babies born at the hospital next year, compared with 500 in 2010. Meadowlands even opened a satellite ER on high ground that saved lives when Hurricane Irene stormed through the region last year, they said.

“In the year and a half of ownership, MHMC’s parent company, MHA, has been able to improve patient care and meet its fiduciary responsibilities, satisfy millions of dollars of loans and invest tens of millions of dollars in new equipment for the facility,” McVey said.

But state lawmakers say the financial report suggests the for-profit company is placing the priorities of investors over the health and long-term viability of the hospital, a growing concern throughout North Jersey as for-profit operators continue to take over non-profit hospitals.

“It confirms for me that this specific model is to maximize profits and to do it in a manner that is in my view unethical,” state Sen. Joseph Vitale, chairman of the Senate Health Committee, said last week. “They’re just trying to suck as much money out of the system as possible.”

The union representing more than 400 employees at Meadowlands has requested a meeting with state health officials to discuss the hospital’s finances as well as patient-care issues.

“We are deeply concerned for the future of Meadowlands Hospital — and its ability to live up to its mission,” union president Ann Twomey wrote in a letter to the state Health Department.

All hospitals are required to file audited financial statements with the Health Department, and the document obtained by The Record is a draft of an audited financial statement. The final report hasn’t been submitted, state officials said.

When they purchased Meadowlands, the owners set out to prove “health care can be profitable and high quality,” Dunaev said. In an interview, she and McVey spoke about how the hospital has striven to give residents the care they need, while taking a hard line on expenses, even getting managers out of offices and onto the hospital floor. “We work,” Dunaev said.

The hospital’s bottom line has turned around at an unheard-of pace in New Jersey. Meadowlands reported a $9 million profit in 2011, compared with a $10.4 million operating loss in 2010, the financial report said. That allowed investors to recoup $8 million they invested to purchase the hospital just one year earlier.

But despite those profits, Meadowlands has $72,000 cash on hand, the audit found. That translates into less than a day of available cash when the median in New Jersey is 62 days, according to a formula prepared by the New Jersey Health Care Facilities Finance Authority, which is considered a key measure of a hospital’s financial health.

“Those in charge of the hospital are putting investors first to the detriment of the financial stability of the hospital,” said Renee Steinhagen, executive director of New Jersey Appleseed Public Interest Law Center, who has been voicing her concerns about the hospital’s conversion to a for-profit.

Companies owned by trustees are also cited in the audit as doing business with the hospital. For example:

The hospital has purchased $603,316 worth of equipment and supplies from Roseland Ambulatory Surgery Center, which is owned in part by two members of the hospital’s board of trustees. And Vogster Entertainment, which is also partly owned by two board members, provided nearly $1 million in software, software development, computer hardware and website support. The board members were not identified.

In addition, two trustees are set to earn 13 percent interest on a $5 million loan to the hospital, the report states.

The loan came after Meadowlands defaulted on a note to the previous owners of the hospital, Liberty Health — a loan that had carried a 1.5 percent interest rate, the report said.

When asked why the hospital would give up such a good rate if the original loan hadn’t been in default, Dunaev said they wanted to “cut the umbilical cord” with Liberty Health. She also noted that they went to other banks for a loan and were offered rates of 16, 17 and 18 percent, so the 13 percent was the best they could get.

Dunaev also took issue with the auditor’s characterization of several bank accounts opened by a board member as a “petty cash” fund. The accounts were set up when a bank used by the hospital was experiencing difficulties, said Dunaev, who blamed the overdraft and bounced check issues on problems with that unnamed bank. As of Dec. 31, the board member was owed $97,860 on those accounts, the report states.

The state Department of Labor investigated complaints about insufficient funds to cover checks in March and found funds weren’t available for a few days, a state official said. The hospital attributed the delay to a switch in banks and made the payments, the official said.

Meadowlands is one of a growing number of hospitals in North Jersey converting to for-profit care. In Hudson County, where the medical center is located, four of the six hospitals are now operated for profit.

Other ventures in the region include Hackensack University Medical Center’s plan to open a 126-bed hospital in Westwood next year with its for-profit partner, LHP Hospital Group. The pair also took over Mountainside Hospital in Essex County last month. The financially strapped St. Mary’s Hospital in Passaic announced in June it would be sold to Ascension Health Care Network, the nation’s first for-profit Catholic venture.

In its bid to purchase Meadowlands, MHA vowed to maintain the hospital as an acute-care center for seven years. State data reveal a dramatic increase in outpatient services under the new ownership: In 2010 there were more than 5,500 same-day and outpatient surgeries, which grew to more than 18,000 cases last year.

The principal owners, Dunaev and Dr. Richard Lipsky, a Woodcliff Lake anesthesiologist, are referring patients to Meadowlands from the ambulatory surgery centers they operate in Essex and Bergen counties, according to testimony at a state Senate hearing last year on the emergence of for-profit care. Insurers testified that the hospital was charging excessively for steroid back injections, knee surgery and other procedures to treat auto accident victims.

Interviewed last week, Vitale said the hospital’s business model “gave them the ability to make millions of dollars in profit at the expense of everyone else.”

Jeanne Otersen, a spokeswoman for the Health Professionals and Allied Employees union, said in an interview: “When our researchers reviewed the draft of the audited financial statement submitted to the state, it became obvious that the for-profit owners and trustees are treating the hospital as their own personal piggybank.”

With millions in taxpayer dollars passing through the hospital, it deserves greater scrutiny, said state Sen. Loretta Weinberg, D-Teaneck, who sponsored a bill passed in the Legislature to create greater transparency with for-profit hospitals.

“How did this money come out of our health care system?” she noted. “How did that money generate enough to pay back investors $8.4 million?”

“We’re supposed to be providing health care at the lowest possible cost and the most accessible means,’’ she said. “The whole for-profit environment needs to be examined carefully.”